I live in California. In 2006 we did a cash-out refi and HELOC.

Resolved Question:

I live in California. In 2006 we did a cash-out refi and HELOC. Due to the failure of our business, we filed for Chapter 7 BK in 2008. At the time of the BK, we had $100K in assets, $2MM in liabilities and $225K in income. Though our income has averaged $225K post-BK, it's unpredictable.

We received a bank modification in 2010, but due to our erratic income, we decided allow the bank to foreclose on the house. The two mortgages total $800K, and the house is worth $550K. Other than retirement money ($100K) and $30K in cash, we have no other assets.

From what I understand, we will not be required to pay taxes on the gain of the house once the bank sells it at auction due to the Mortgage Debt Relief Act, and because we had proven insolvency in 2008. My concern is that the Mortgage Debt Relief Act expires in 2012 (unless its extended a second time). Presuming it expires, before the bank forecloses, is it possible that I will get stuck paying taxes on the gain, or am I forever off the hook because of the BK?

Yes, we included the 1st TD (Chase) ~$700 and 2nd TD (B of A) ~$100K in the BK and did not re-affirm either debt.

WALLSTREETESQ :

then after the foreclosure you are not liable for any cancellation of income as the bankruptcy filing vacated your obligation

Customer:

Meaning no deficiency judgement or tax liability?

WALLSTREETESQ :

The most common situations when cancellation of debt income is not taxable involve:

Qualified principal residence indebtedness: This is the exception created by the Mortgage Debt Relief Act of 2007 and applies to most homeowners.

Bankruptcy: Debts discharged through bankruptcy are not considered taxable income.

Insolvency: If you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable to you. You are insolvent when your total debts are more than the fair market value of your total assets.

Certain farm debts: If you incurred the debt directly in operation of a farm, more than half your income from the prior three years was from farming, and the loan was owed to a person or agency regularly engaged in lending, your cancelled debt is generally not considered taxable income.

Non-recourse loans: A non-recourse loan is a loan for which the lender’s only remedy in case of default is to repossess the property being financed or used as collateral. That is, the lender cannot pursue you personally in case of default. Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income. However, it may result in other tax consequences.

the bank that gave you the modification was the same bank that was listed on your petition?

Customer:

Are we relieved from tax liability because of the Mortgage Debt Relief Act, or because of the BK? What happens whent he Mortgage Debt Relief Act expires (presuming it isn't extended)

Customer:

Are we forever exempt from the tax liability because of the BK, or because of the Mortgage Debt Relief Act?

WALLSTREETESQ :

Because of the Bankruptcy filing first, the MDRA also applies

WALLSTREETESQ :

If the MDRA does not get renewed, the fact youfiled a bankruptcy resolves the issue

WALLSTREETESQ :

Sec. 108(a)(1)(A) that provides that cancellation of indebetness income is not includable in taxable income if the COD income is from discharge during a bankruptcy.

Customer:

Sorry for the duplicate question. What a relief! No one has been able to answer that question for me. My BK lawyer told me I was exempt from a deficiency judgment and state/federal taxes, but I didn't know if it was because of the BK or the MDRA. I even called the IRS, but didn't trust their answer. I am soooo glad that my exclusion has nothing to do with the MDRA. With our nation's debt problem mounting as it has been, I fully expect for the MDRA both at the federal and state levels to be repealed (or terminated, as it were). Thank you for your help, you really took a load off my mind!

WALLSTREETESQ :

Bankruptcy law would not help any debtor if they had to pay taxes on their canceled debt, so as long as the mortgage was listed and discharged, they cannot come after you,

WALLSTREETESQ :

Good luck,

WALLSTREETESQ :

If satisfied with our service please press the accept button so we can receive credit.

Customer:

I just realized that I failed to answer one of your questions, yes I got the modification with the same mortgage company. Though that probably doesn't change your answer, I just wanted to acknowledge your question. If you have any additional questions, please ask, otherwise I will wait a few minutes to accept.

WALLSTREETESQ :

I just wanted to make sure, also remember the bankruptcy law states "Loan modifications after a chapter 7 bankruptcy can only be binding as to the debtor on the note if the debtor reaffirmed the mortgage with court approval during the pendency of the bankruptcy case. 11 USC 524 prevents the debtor and creditors from entering into an agreement after bankruptcy for a debt that was discharged in bankruptcy. Therefore, unless the mortgage was reaffirmed in bankruptcy, any post discharge home modification is only binding as to the creditor’s lien rights."

I will tell you that...the things you have to go through to be an Expert are quite rigorous.

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